Year-in-Review 2022
By Macy Jae Moore on December 19, 2022
Written by: Christian Gannon & Zeke Anders
In many aspects, 2022 revolved around monetary policy and the effects of trying to reverse a decade of policy actions. Since the Great Financial Crisis (“GFC”), US interest rates have remained persistently low and central banks globally have propped up economies at any sign of weakness. These policy actions have backed policymakers into a proverbial corner where there was a need to unwind these policies regardless of ramifications to the overall economy.
The Fed slowly began raising rates from 2016-2019 but the onset of the pandemic forced it to act quickly to protect the economy from its potential imminent collapse. At the same time the Fed reimplemented zero interest rate policy (“ZIRP”), it also flooded the market with capital to support consumer households as the economy ground to a halt. The chart below shows the growth of the Fed’s balance sheet since 2004.
The personal savings rate skyrocketed in 2020 from its historical average around 10% to nearly 35% as households were flooded with capital but didn’t have anywhere to spend it. Supply chains were broken due to factory shutdowns, shipping challenges, and labor shortages. These challenges were felt all across the value chain as we all struggled to get even basic necessities (like toilet paper).
This brings us to the story of 2022, as markets began to reopen, and “transitory” inflation turned out to be more embedded than many policymakers initially believed. The Fed was forced to rapidly raise interest rates to curb inflation that peaked above 9%. Bond markets repriced rapidly in response leading to one of the worst years on record for fixed income investments. Inflation proved stubborn to cool as consumers spent excess reserves on services that they had been starved of in prior years.
In tandem, supply chain woes plagued much of the economy leading to difficulties across the market. Auto manufacturers struggled to get chips, long wait times for appliances and housing related goods, and high inventories for retailers were just a few examples of these challenges. The conflict in eastern Europe sent markets reeling as well and tested global energy supply chains and created an added headwind for global equity markets.
BUT… we must not get bogged down in the negativity of today. We have always displayed great resilience even in the face of great challenges. In the last century we have faced world wars, cold wars, scorching inflation, emerging markets crises, health crises, multiple crashes, and in the face of all of those things, markets, the economy, and consumers have always thrived. These challenges make us better. Only through testing can we learn to adapt. We also learn more about what we value and what we can tolerate. All of these things can help us to build better portfolios that prepare us better for the next time we face these kinds of circumstances.
Challenge is an inevitability. Markets have always cycled, and we have been reminded again that markets continue to cycle. One of the greatest challenges of good investing is to maintain focus when markets are not moving in your favor. This can be in a period such as the last 10 years when market participants were forced and encouraged to take on greater levels of risk. It is also true in a year like 2022 when negativity abounds, and everything seems so bleak. As the old adage goes, “It’s always darkest before the dawn.”
We may not see a sharp recovery as has been the character of the most recent cycle. We may face more challenges as policymakers continue to unwind those decisions, but we have always adapted, and we have no reason to believe this time will be any different. Good investing begins with a plan. Once we have that plan there are three keys to being successful over the long-term. Diligence, being careful and persistent in focusing on your individual goal. Discipline, finding what works and doing it over and over again. Lastly, patience, sticking to time weathered strategies and maintaining focus on your long-term goal. Keep the end in mind and don’t rush the process.
We’ll leave you with this quote from Warren Buffett when asked by Jeff Bezos why everybody doesn’t just copy his investment style. His response was, “Because nobody wants to get rich slowly.” Good investing is not often that exciting in the short run but can be very rewarding in the long run. Staying grounded and focused on your individual goals is the key to staying the course for the long-term.
2022 Review and 2023 Planning Outlook
2022 was a less dramatic year for financial planning than 2021. In 2021, Congress was creating proposals that would eliminate back-door Roth conversions, end Roth conversions, institute account-size-based required distributions from retirement accounts and changing popular estate planning strategies to make them much less attractive. Those changes ultimately did not come to pass, and these strategies remain intact. One of the biggest changes was the President’s order to forgive student loans. This is currently being challenged in the courts, and there’s a chance it will be overturned. Another change was the IRS regulations stating certain IRA beneficiaries would be required to take required minimum distributions in addition to distributing the inherited IRA within 10 years. For two years everyone believed RMDs were not required, only complete distribution by the end of the 10th year after the account owner’s death. The IRS interpretation set off a wave of confusion and concern over missed RMDs, leading the IRS to delay the rule until 2023.
Looking ahead to 2023, inflation has made an impact on planning, in that tax brackets will be raised 7% generally, contribution limits to retirement accounts will be increased, the gift tax and estate tax exemption amount will be increased to $12.92 million per person, and the annual gift tax exclusion will be increased to $17,000 per person per beneficiary. These increases offer opportunities to potentially decrease income and gift/estate taxes. Social Security benefits for those age 62 and older, whether they have been claimed or not, will increase 8.7% in 2023. This is a significant increase which will help retirees contend with rising prices. Medicare Part B premiums will stay the same, which also helps retirees. Congress is working on a SECURE Act 2.0, which may allow retirees to delay 401(k) and IRA required minimum distributions beyond age 72. The provisions under discussion so far are generally favorable to workers and retirees, rather than punitive. As the bill gets closer to potentially being passed, we will share more details. This bill has bipartisan support, which may allow it to get through the divided Congress and be signed into law. Beyond these proposals, we can probably expect gridlock to limit transformative legislation over the next two years.
In this volatile market, planning is as important as ever. The last two years have shown the importance of having an estate plan in place, investing appropriately for your objectives and time horizon, and being adaptable. As we look ahead to 2023, we look forward to working with you on your financial plan to help you realize and achieve your goals both personally and financially.
Zeke Anders – Planning Specialist | zanders@twickenhamadvisors.com
Christian Gannon – Director of Investments | cgannon@twickenhamadvisors.com
Disclaimer
Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.
